Main menu

Secondary menu

Where's the Price Signal?

By THOMAS L. FRIEDMANPublished December 3rd 2008

It is now more clear than ever that Barack Obama is not going to be able to impose a gasoline tax, set a carbon tax, or establish a cap-and-trade plan for carbon emissions in his first year in the White House. How can we have a green revolution without a price signal—a sign to investors that the market for clean energy solutions is huge and a sure thing? I am interested in any ideas you have—and I am sure Obama will be too!

Ideas:

For most of his book, Friedman talks about a global economy, but for the chapter on "price signals", it seems it's all about American prices, American taxes and cap-n-trade, and American clean-fuel innovation! In Europe, gas prices are much higher than here in the U.S. and yet, no wonderful new clean-fuel technologies have been invented over there. If someone WERE to come up with a clean fuel technolgy, you can believe the investors would have no worries about profitability! Even if gas prices in the U.S. were low, Europeans would snap up the cheap, clean technology. Raising gas taxes here in the U.S. isn't going to cause a clean-fuel miracle. It will just raise taxes, and maybe increase sales of hybrid cars...
This climate-change and wealth-transfer-to-petro-dictators problem will only be solved by some revolutionary new fuels and/or technology. Taxes will not do very much (unless it's all funneled into renewable/clean fuel and battery-research), especially with India and China opening new coal-based power-plants every week...

Chapter 5, Hot, Flat and Crowded. You criticize Republican conservative for not supporting environmental conservation. I am a Republican conservative and totally agree with you on this point. I hated seeing McCain supporters chant "Drill Baby Drill". However, your hero, Al Gore, sets a poor example when he flits around the world on his personal jumbo jet. Depending on individuals to be environmentally responsible is folly. The problems will self-correct when the oil is depleted.

I recently saw a documentary "Earth 2100" where you, John Podesta and Amory Lovins were speakers. Although I do not think our worldwide energy and environmental future will necessarily unfold as that documentary implied, I think something like that future is very likely. Unfortunately, I think the inertia to continue our business as usual modus operendi cannot abate fast enough even if there were a unified international effort to do so. I do not think our Congress or our world leaders are anywhere near working on the crises the Earth 2100 foretold. We are stuck and world overpopulation will become self-correcting in a matter of a few decades. Our generation is leaving a dismal legacy for our children and grandchildren. I wish somehow our world leaders could be shocked into corrective action.

My bookclub just finished the book. We loved it. The improvement I would make is to the market electricity pricing scenario. Utilities don't pay market price for most of their energy. They agree to buy X number of Kilowatts and pay a fixed price for a 15 - 20 year contract. Charging customers market price around the clock would be major price gouging of the customer. Choosing a reasonable margin would make it easier to keep electricity cheap without making gas more expensive.

As you point out, a carbon tax is a necessity. The billions upon billions of decisions that U.S. households and businesses need to make to convert to a sustainable economy—(just consider one individual’s housing decisions: how large a residence, located where, how insulated and sealed, with what fuel, at what room temperature, etc.)—cannot be effectively motivated or implemented without a clear price signal that reflects the associated environmental damage. Such corrected prices contain the information to allow the decentralized network of private transactions that is the market to do what it does best: to allocate resources seamlessly and efficiently.

Below are a few additional points relevant to a carbon or non-renewable fuel “tax.”

(1) I put “tax” in quotation marks because the term should be reserved for government levies whose primary purpose is to provide revenue to finance government activities. That is the reason the government taxes personal income and corporate profits, for example. The problem with taxes such as these is that they create market distortions and efficiency losses by discouraging income-earning and profit-making activities. On the other hand, economic “charges” (such as those on carbon emissions), introduced to correct for negative externalities, are the perfect public finance mechanism in that they remedy rather than create market distortions and efficiency losses. Thus, a charge on carbon emissions has the desirable effect of reducing them.

(2) The way to introduce carbon or non-renewable fuel charges in a politically palatable way, particularly during recessionary times, is to package them with a corresponding tax reduction—say, by reducing or eliminating payroll taxes. Sweden adopted such a revenue-neutral strategy in 1991 when it introduced a tax on carbon emissions while reducing income taxes by a similar amount. By the way, carbon or non-renewable fuel charges also generate an ancillary benefit by diversifying the sources of government revenue—thereby increasing revenue stability and fairness, and reducing incentives to evade taxation.

(3) As some have glibly suggested, why not use (politically attractive) subsidies rather than taxes or charges to promote clean, renewable energy? In fact, government subsidies may make sense, in a limited way, in terms of developing a renewable energy infrastructure or stimulating the successful development of renewable energy technologies. However, relative to a carbon/non-renewable fuel tax, subsidizing every unit of renewable energy produced and used would be a fiscally disastrous mechanism to encourage renewable energy. The reason is that such an economic subsidy would not only fail to provide the revenue-generating benefits of an economic charge; the subsidy itself would generate further debt that would have to be financed by an increase in government taxation of some type, with attendant market distortions and efficiency losses.

-------------------------------------

On another subject, on pages 272-3 of HF&C, you refer to the theory that “appropriately planned environmental regulations will stimulate technological innovation…” as “the 'Porter Hypothesis,' first expounded by the Harvard Business School professor Michael Porter in 1991.”

Actually, that theory was previously developed by Nicholas Ashford and others at MIT (myself included) in the 1970s and 1980s in various studies and published research. See, for example, Nicholas A. Ashford, Christine Ayers, and Robert F. Stone, “Using Regulation to Change the Market for Innovation,” Harvard Environmental Law Review, Vol. 9 (1985), No. 2, pp. 419–466, and the MIT references cited therein. (Several writers in the field have noted that the so-called Porter hypothesis was preceded by the work of Ashford, et. al. See, for example, page 154 of Adam B. Jaffe, Steven R. Peterson, Paul R. Portney, and Robert N. Stavins, “Environmental Regulation and the Competitiveness of U.S. Manufacturing: What Does the Evidence Tell Us?” Journal of Economic Literature, Vol. XXXIII (March 1995), pp. 132–163.)

I should mention that, although Ashford and Porter agree that properly designed regulations can have a positive effect on innovative activity, productivity, and competitive position, they do have some fundamental differences about the workings of the innovative process. Ashford’s group at MIT developed both a “weak form” and a “strong form” of regulation-induced innovation theory. The “weak form,” which focuses on modest or incremental innovation in pollution control and, to a lesser extent, on significant pollution prevention, is more or less what Porter’s work emphasizes. The “strong form,” embraced by Ashford’s group at MIT, argues (1) that the source of the most important innovations is new entrants that replace dominant technologies rather than existing technology providers offering incremental change, and (2) that stringent regulation (including the imposition of significant economic charges) can bring about such dramatic innovative responses.

Tax Oil!
“Peak Oil” is when the rate of extraction of oil from the earth reaches a maximum. The U.S. reached this point in 1970. It now appears that the world reached this point in 2008. Peak oil occurs because of the increasing difficulty in sucking the dwindling supply of oil out of the earth.
So what, you say? The fact is that our nation’s extremely high productivity, our whole extremely high standard of living, depends on this wonderful and inexpensive source of energy. But as its supply diminishes, and as its cost escalates, our productivity and our economy will decline, along with our current luxurious standard of living. So the prospect of our supply of oil dwindling is a big deal, a really very big deal indeed.
Okay, so what can we do about it? This is something that can best be answered in retrospect. Human genius may well create many innovative solutions and/or alternatives to our economy’s oil-based engine. But if we wish to meet the challenge, if we wish to survive the downturn, and if we wish the U.S. to be an economic and technological energy leader, then we must anticipate the problem and attack it now. Waiting until oil costs $200 per barrel will be too late. At that point we would lack the financial capacity to mount an effective effort.
So we must reduce oil consumption and look for alternative solutions. But how do we do that? Easy, just raise the price of oil! This is called basic economics. It is by far the most effective and fastest acting way to reduce oil consumption. The problem with raising the price is, of course, the high price. But this can be solved by returning the tax revenue to U.S. taxpayers as an income tax rebate. In this way we recoup the higher cost of oil as it ripples through the economy. And the higher cost will have exactly the desired effect, of stimulating individual and business actions that create solutions and alternatives to the looming oil crisis before it occurs.
As an example of this oil tax, let us envision a tax of $100 per barrel. That would take us back to July of last year. But now, instead of OPEC pocketing the dough, the money is returned to each and every taxpayer as an income tax refund - a payment of $7,000 for each tax return, twice what the typical taxpayer pays in federal taxes! This pays more than twice the expected increase in the cost of gasoline, with enough left over to accommodate the overall increase in the cost of living due to our other dependencies on oil. And to sweeten the deal the rebates can be given in advance of imposing the tax.
The ripple effect of higher oil prices will not be uniform, with some products increasing in price hardly at all and others, such as air travel, increasing very significantly. Thus natural market forces will encourage every U.S. company and every U.S. taxpayer to attend to the challenge individually, in their own ways, free of government direction or oversight. And this, in turn, will unleash the power of American ingenuity and innovation.
In summary, this technique of forward pricing oil and returning the tax revenue to U.S. taxpayers uses basic market forces efficiently and effectively to achieve the following:
• reduced gasoline consumption
• reduced dependence on foreign oil imports
• reduced net cost of gasoline (by reduced demand)
• a net positive financial gain for most households
• major stimulation of the economy (via the tax rebates)
• reduced carbon dioxide emissions
• major increases in alternative energy research and innovation
• U.S. leadership in alternative energy (via research and innovation)

The "net-positive" gas tax is a quadruple-win - a way to suppress gasoline consumption, restrain the escalating price of oil, win majority voter support, and increase consumer spending, all with one very simple gas tax/rebate policy. Read on...
_____________________________

Richard Lugar, in the February 1 issue of the Washington Post[1], supported Charles Krauthammer’s so-called “net-zero” gas tax idea.[2] This net-zero idea is an eminently fair and painless way to combat our looming oil crisis. What makes the idea so great is that the taxes collected are given back to tax payers in the form of an income tax rebate. And to sweeten the deal, the rebate can even be given before the tax is collected.

By artificially raising the price of gasoline, the net-zero gas tax uses highly effective market forces to channel usage and investment away from oil and toward alternative sources of energy. This market-based approach demonstrated its effectiveness in response to the surge in oil prices last year: gasoline consumption subsided and gasoline prices plummeted. During the surge, it was the Saudi’s pocketing the dough. Net-zero puts the dough back into U.S. taxpayers’ pockets.

The most compelling reason for a net-zero gas tax was neglected by Lugar and Krauthammer, though. The fact is that, on a household-by-household basis, net-zero is actually “net-positive”, and progressive. This is because there is a strong positive correlation between household income and household gasoline consumption.[3] Thus the net-zero tax gives a net positive financial benefit to a significant majority of households, because households with the greatest income tend to be extravagant while households with the least income tend to be frugal. The result is a financial windfall for a substantial majority of taxpayers, especially those with the greatest need. This will then also serve as an added economic stimulus, with immediate and continuing benefit to the economy.

There is urgency in implementing this net-positive gas tax idea, however, because of accelerating declines in global oil production.[4] Oil prices (and political tensions) will escalate in response to the inexorable increases in the global demand for oil, most notably in China and the developing world. Thus if a net-positive gas tax is to be imposed it must be done now, before natural free-market forces drive the price beyond our ability to bear an additional tax. This in fact already happened, last year. Fortunately, the current recession has given us a reprieve, one final window of opportunity it seems. But we must act immediately to hold down the price of oil, or else prepare to open our wallets to OPEC.
_____________________________

The more I think about it more I am convinced that your idea of a carbon tax giving a market signal would not work. Why? This carbon tax will affect not just the energy comapnies who will conveniently pass it on to the customers as we are held hostage to some form of energy. It will also affect the every truckers, farmers etc who have a very thin margin as it is. This will eventually become one of the taxes whihc we will all pay for and get used to. However if there is a cap on carbon emissions by the energy companies and have a transition of 5 years where there is opportunity to minimize their emissions it will no longer be a tax which they can pass on to the consumer. I believe that the energy companies need to be allowed to change their behaviour by allowing them to gain credits by demonstrating that they were putting in place technology to minimize emission but not trade their way out of it through purchase of credits from other sources. The level of emissions that the energy companies can emit need to be reduced every 3-4 years. There is an additional advantage in this as agricultural land can be brought back to life with the use of perennial pastures such as alfalfa and ryegrass which sequester carbon in the soil and give soil much better health comapred to dumping of fertilizers which takes place today. This encourages both farmers and corporations to buy land and sequester carbon either through shortterm cycling of the land through the use of pastures or longer term locking of the land through afforation programs. The more we encourage the land to be managed better the productivity of the land will go up without affecting the net production capability. Regarding cars in the US it is high time that people used smaller cars and design of the cities in the US changed to development of mall amidst populated areas whihc will enable people to walk to the malls as opposed to use of cars. Public transport is not the most convenient option for all for every purpose however encouraging development of multipurpose suburbs with schools, residential areas, parks and malls to be together allows people to use them more rather than drive longer distances for these purposes. The US needs to change its way of living inorder to reduce carbon emissions. Just blaming the petropolitics will only make people think that it is a problem created by politicians without individuals taking responsibility. If everyone of the US citizens grew a few vegetables in their backyard they would not only save money but also save enacouraging long haul trucking of vegetables. If every US citizen bought a metal dryer of hills hosist as we do in Australia and used it to dry clothes using sun much of the energy would be saved. If every US citizen switched off one of their kids TVs then result would be very good. So Mr. Friedman please put the onus back on the US citizenary who have taken cheap subscidized energy which has come at a cost to the rest of the world for granted. It is lucky that rest of the world is not in a position to impose a carbon tax on America for every item they export. So it high time Americans started understanding that they are a carbon burden on rest of the world. Currently they are also a financial burden on rest of the world. Unless America wants to remain so it needs to change that includes every man wonan and child. Dont be fooled by the chinese or Indian laid back approach to this issue. There are people there who will make changes despite their government irrespective what market signals are as these people are used to saving energy, money and are used to recycling by birth. These people are not used to complaining about lack of uninterrupted electricity as they are used to studying despite these problems. I was one of them who got my masters degree in India studying under candle light as electricity cutback was "normal". Despite this I got university gold medal. I proceeded to do my Phd in Australia with a scholorship. I have never taken my life in Australia for granted. I save every bit of electricity and water I can. There are many more in India like me so Mr. Friedman these people are not bothered about petropolitics but for them the market signal is cheaper unintruppted powersupply and if this happens due to wind or hydro or solar they will work towards it and achieve manufacturing of these components cheaply. How can Ameraica with it arrogant attitude towards energy usage and with its uncompromizing attitude towards lowering standard of life through saving achieving this? No one in the US will be or can be paid lower wages can they so how can you sell your technology at the "Chindia" prices to these countries even without a carbon tax leave alone with one? If the west has to compete with these countries it can only come through monumental innovations whihc China and India are not capable of in the next 5 years. This would include photvoltoic cell which can generate 100 times more than current technology can, a hydrogen compression technology which can compress more hydrogen PSI, better enzymes whihc can generate more biofuels per feedstock, better computing technology which can manage fuel of any sort in a streamlined manner, better solar chaged light bulbs for homes, better irrigation system minimizing water use and maximize food production, a multi purpose approach to farming systems similar to Australia, and more eneryfriendly cities and suburbs. Please dont delude yourself that America will be cleaning the dirt produced by China or India as Americans do not have the mindset to do anycleaning up of Asia. However rest of the world will be happy if America cleans up its own backyard. I hope your next book will be how America can clean up its own backyard.

I've been trying to learn more about how the 'green sector' plans to acclimate consumers to the 'true cost' of things. When slavery was the only economically viable system for continued prosperity and growth, people thought they knew the true cost of a bale of cotton. After the civil rights movement began and sharecroppers lost their free labor, the cost of cotton changed and consumers adapted.

Well, our materials economy hasn't changed too much. We still have slave labor. The slaves are just in a different country. Plus, we now have environmental considerations, not just human rights considerations.

How can we convince consumers that they need to pay more for everything? Especially in the low- to middle-class income families? How do we convince people that they need less?

I pose these rhetorical questions to provoke thought on these chat boards. What can anyone do to help acclimate the general consumers of the country to a higher cost of goods, services and energy?

A gas tax and related price signals will be hard for the general public to stomach unless they really start to understand the 'true cost' of the American way.

I am a large commercial solar project developer for a company called Solar Power Partners, one of the biggest solar developers in the US. We have in excess of $200M in funding available this year to invest but are having a very difficult time finding clients. The reason is that even with the Federal ITCs and State rebates, it is very hard to be able to offer solar energy at price parity with the retail energy rates from the utilities. Simply establishing RPS mandates or Cap-n-Trade systems will still enable the utilities to control the renewable energy market and stifle its growth if they want to.

We need to look at methods to regulate the utilities down to a level of granularity that will prevent them from sabotaging renewable energy. Intentionally or not, the major utilities are stifling solar development by increasing the "Demand" potion of their bills relative to the "Consumption" portion. Since solar energy (via Net Metering) can only offset the consumption charges, the portion of their bills we can offset keeps getting smaller and smaller, making it even more difficult to reach price parity. A nationwide solar friendly DG-R (Distributed Generation - Renewables) tariff will prevent the utilities from playing with the tariff structures to keep solar energy from becoming competitive with their fossil-fuel retail energy.

FITs (Feed-in-Tariffs) could immediately launch the development of utility scale solar energy sites to provide wholesale solar energy to the utilities. It would only add a few dollars to the every utility bill (hopefully on the consumption charges, not the demand charges).

How would you like to be the Product Planning Manager at a car company, domestic or foreign today? What will demand be for your model mix 5 or 10 years from now? Wouldn't it seem beneficial if government as a spokesman for our society gave these individuals some insight?

It does not seem wise to govern production as we have done with CAFE as opposed to influencing demand.

I read and enjoyed Hot, Flat, and Crowded. I think you were successful in making the argument that only by first modifying our market’s price signals that we can make true lasting progress in moving our economy from a carbon-based one. I also agree that the West has no right to lecture advancing economies on the errors of their carbon-based ways, when they are simply attempting to raise the quality of their lives by following our example. This is all the more true as we do nothing serious to mend our ways. Our only option, in my view, is to put our own house in order and by our example lead the way.

I believe that correcting our market is the first, most important, and possibly the only necessary step to bringing about a change from a carbon dominated economy. If the prices of our products and services accurately reflected their cost to the environment, people would change their behaviors. There is no greater force for the cooperation of masses of people toward any goal than their own financial self-interest. This is all the more true in times of economic austerity. There could be no greater force than eight, nine or ten dollar a gallon gas prices to bring about a demand for carbon-efficient transportation and to create a market for efficient transportation solutions.

There is, of course, an obvious political drawback to proposing a seven dollar a gallon carbon tax on gasoline (not to mention the related but equally necessary taxes on coal, heating oil, and other carbon intensive sources of energy). But I believe that the drawback arises not from being too bold, but from being too timid. Our recent brush with bankruptcy in California is an apt example. Despite the fact that the state is nearly broke and the fact that state policy is to drastically cut our greenhouse emissions, our green, Republican governor was unable to get a twelve cent a gallon gas tax passed. The problem, I think, is that twelve cents is too little to be seen as a disincentive for gas use, but large enough to be seen as simply another added tax on a tax weary population. Desperate times call for bold measures.

I therefore propose a theme for your consideration in a hypothetical Chapter 18 to your book: A new compact among and between the citizens of the United States. The compact is simple: That our society will raise money for our mutual purposes only through the taxation of our negative effects on the natural environment, beginning most urgently with greenhouse gases. The corollary to the compact is this: As we tax carbon and environmental pollution, we eliminate income taxes, sales taxes and property taxes, beginning with the most regressive.

I believe such a compact could change our society in positive respects, would be popular with the populace and is practical. The most important benefit is obvious. By correcting market signals in the United States to account for the damage of greenhouse gasses, 200 million people would commence searching for solutions to the problem, rather than the hundreds of thousands of present day true-believers. They would do so because it would make economic sense to do so, for the good of themselves and their families. As was demonstrated in the oil shocks of the seventies and the oughts, a rise in the price of gas can result in the immediate demand for efficient transportation and other alternatives.

The compact would apply much more broadly than to carbon pollution. The same effect should be expected for any environmental impact that was appropriately taxed. Habitat destruction, as you point out in your book, is at least as large a problem as climate change. A tax system under the new compact would no longer tax land on its value, but on how its use impacted on nature. Thus, no tax would be levied on land kept in its natural state. Taxes of increasing amount would be imposed on land used for grazing, farming, and yardscapes, with the largest tax on land that was paved over. There would be no greater tax levied on land for utilizing it more intensively, once it had lost its ecological value. It is not difficult to imagine multitudes of suburban residents linking their large yards together and reverting them to natural habitats, in order to lower their property taxes. Neither is it difficult to imagine large investors deciding to more intensively utilize land whose natural characteristics have already been destroyed rather than destroying the ecological value of undeveloped land.

I also believe that such a compact could become popular now. In fact, this is the point in history to bring such change about. Our current tax system raises the vast majority of its money by creating disincentives for activities that society should encourage, and activities we desperately need. Our system discourages work by seizing a portion of people’s incomes; it discourages spending by taxing sales; and it discourages property ownership by taxing the value of people’s property. Eliminating such a system could have broad appeal to conservative and liberal alike and serve to bring people together, rather than to move them apart. Doesn’t it seem that, whenever a legislature considers new programs or initiatives, or providing help to those that need it, the debate degrades to a routine argument about who the necessary money will be taken from, rather than the necessity for and the good the initiative would do. Such a debate would no longer be necessary. The money would be taken from those of us who pollute and would not create a disincentive for positive behavior. We would have a tax system in which every person would know, by the very fact of paying the tax, that they had contributed to their own survival. And, we would have a tax system in which every person would have a degree of personal control over the amount of taxes they pay. Discussions about how to spend the tax money could become more rational. In the short term, as the price of carbon pollution increased, the reduced income, sales and property taxes would remain in people’s pockets to help them finance alternative solutions to burning carbon.

Finally, I believe such a tax system is practical and could be instituted almost immediately. If there is any single thing at which a government can be efficient and effective, it is the collection of revenue for its operations. The institutions are in place to tax pollution and habitat destruction. Only a change of emphasis is needed. The federal government has the ability to address greenhouse gasses . State government might raise money by addressing air, water, and soil pollutants of more regional significance. County government (my employment and interest) is ideally suited and currently in the business of levying taxes on property. Government need not grow to address our climate and environmental challenges, it need only do what it does best, but with a different emphasis.

I am not so completely naïve as to think that such societal change would be easy. Change is never easy and is always frightening. However, we live in frightening times. Drastic action is needed and is needed now, both to alter our relationship with our environment and to stimulate our economy. I can think of no more effective way to bring about such change than to use the market, and no better way to use the market than to adjust prices through taxes. The hard part is to convince people there is a better way. We need opinion leaders such as yourself to articulate the possibilities and lead the conversation. I know you do this daily through your books, columns and activities. I can only encourage you to keep up the good fight.

I believe the best way to create the price signals is not through government regulations or intervention. I believe there is a way to harness the power of the internet the same way Barak Obama and Ron Paul did when running for the president. I believe there could be a futures market designed based on Green Energy's. We might be betting on our future by not making a change so why not reverse that and bet on a future of what the change will be. This futures market can be setup based on digg.com type website where the energy companies that are the most popular will gain the most public investment via Money Bombs and old fashion grass roots funding instead of massive venture capital companies. Just think if only 3 percent of the us population gave 5 dollars extra beyond taxes to clean energy fund that is not run by the government and was some how not run by thieves how this money could be dispersed and create great things.

If there's demand, investors will come. Make it sexy to go green! Let the desperate housewives talk about going green. Let Oprah talk about energy saving lamps. Let two and a half man joke about it. Let the janitor in scrubs get on a crusade at the sacred heart hospital to reduce energy costs.

You will get a movement out of things like that much easier than by taxes.

I was excited to read your piece,"Obama must hold bankers responsible." It was the first agressive targeting of bankers that I've read from a prominent person in the past 9 days since "60 Minutes" aired its segment on how the investment banking community used ex-Enron traders and their ENRON developed tactics to artifically drive prices of oil (and therefore gasoline) up over the course of 2007 and 2008. True supply and demand forces were not in play, just coordinated manipulation of supply & demand through uncontrolled futures trading and those same banks analysts' pumping up investor demand. The resulting high energy prices triggered the economic slide as personal and commercial transportation costs doubled or more. Inability to pay mortgages and reduced/eliminated discretionary spending were the results. Another reason to hold banks accountable. They shot us and themselves in the foot with their greed.

It should be noted that the oil companies have deliberately cut back on oil processing [1/09] at a time when there are oil tankers anchored in the oceans all over the world because there is nowhere to deliver the oil. Also,the number of active rotary oil rigs drilling for crude in the US in 1988 was 554; in 1999 it was 128; and in 2007 it was 297. Although the American public is being led to believe the oil companies need more drilling rights, they are not drilling where they have rights now.

This is what you get with monopolies. Excess profits, which are always penalized by governments such as Great Britain, where BP was hit with a 30% excess profits tax in 2001, are being rewarded in America by giving the same profiteers a tax cut. Deregulation has lead to this economic breakdown. And regulation can get us out of it.

In other words, regulation of the oil companies could bring the price of gas down to where it was in 2000 $.89 per gallon and then we could attain revenue by applying an increased gas tax.

More importantly, can a democracy exist with monopolies and without regulation?

I would like the Obama administration to look into the creation of an Organization of Petroleum Importing Countries (OPIC) to counterbalance OPEC. I thought of this idea while reading Chapter Four of "Hot, Flat, and Crowded". A quick web search on "OPIC" brought up a couple of bloggers who have mentioned the idea, but mainly did so as a reaction against OPEC. If given the right regulatory imperatives, an OPIC could incentivize green technologies by making them more competitive against a higher average energy price, provide downward pressure on demand and global crude oil prices, and generate international consensus for a move away from carbon-based technology in developed and developing countries.

I just started thinking about this idea today, so please help me flesh it out or correct me where I'm wrong. Here's how I see it working: The chief responsibility of an OPIC would be to collectively bargain for lower crude oil prices against the price set by OPEC. In addition, OPIC would be responsible for maintaining agreements whereby member countries would implement fuel taxes to provide downward pressure on demand within their own countries and to create funds to reinvest in clean/green/carbon-free technology development. The fuel taxes would provide a price incentive that would encourage efficient and renewable energy technologies. By implementing fuel taxes in concert, OPIC member countries could avoid handicapping their own nations' economies relative to that of other member countries. Implementing an OPIC-wide fuel tax would also dampen demand for crude oil, provide downward pressure on the price of oil without collapsing the cost of fuel, and help balance international power between those countries that have many petro-dollars with which to influence geopolitics and those countries that must, for the time being, provide energy for their citizens from abroad.

Why can't we start by practicing a lot of Western Europe's time worn and proven "Price Signals"? I'm sure the Germans would love to be as wasteful a society as we are, but they can't afford it. When I was an exchange student in Germany 25 years ago I was amazed that a family of four could get by with one of those "college sized" mini fridges, and that the garbage can they left on the curb each week was slightly bigger than a grocery bag. The also had this strange practice called "recycling", so there was a lot of stuff that you weren'y legally allowed to throw into your trash can. Whenever someone left a room, they always turned the lights off. Further, the family drove one small car and used the bus as much as possible because gas was ridiculously expensive. We need to penalize waste and excess, just like they have been doing for decades. We also need to reward conservation, because a lot of times it just costs more to be green. A really stupid example from just North of us: In Vancouver Canada they have a light rail system called the "Skytrain". I was staying with my family in the nearby suburb of Burnaby for a sporting event, and we decided to go Downtown for the evening. We took the Skytrain, which was about a quarter mile walk away from our hotel. We were in the cheapest "off peak" time period, and it cost my party of four people $20 to travel the five miles to downtown Vancouver and back. Once in the heart of downtown, we noticed that there was plenty of parking available at a flat rate of $10 for an evening. So taking public transportation cost us twice as much as it would have to drive ourselves and park, and was much less convenient. Since that trip, whenever I am in Vancouver I always look at the Skytrain cars as they go by, and except at rush hour they seem to be very sparesly populated. now I know why. The system is so high priced it's cheaper to drive. And since the system is too expensive to use, there is the added farce of empty or nearly empty train cars shuttling around the city all day long. If the trains run regardless of whether anyone is on them or not, why not make them cheap enough so people will actually use them?

I have greatly enjoyed Hot Flat and Crowded, and would bet that Obama has read it as well, judging from many of his ideas and his appointment of Steven Chu to the Dept of Energy. Your arguments and examples are compelling. If you want your ideas adopted, however, and I am confident that you do, CHAPTER 18, rather than devising a price signal, which I'm not sure is a realistic possibility, will have to deal with the issue of the Market. It will have to direct itself to those who will insist that The Market will take care of it, and those that say that too much regulation and market manipulation will be dangerous for our economic health. Much of what you recommend in your book requires regulation and very specific legislation to be achieved. The market does a good job of determining prices of goods and services, but Chapter 18 needs to consider the LIMITATIONS OF THE MARKET--which are legion. I'm not recommending eliminating capitalism or the market system, simply acknowledging that there are limits in what it can accomplish, especially when dealing with environmental issues. If all those things that the market CANNOT do become clear, then, ipso facto, the only options will be what you suggest: incentives and regulation.

The whole idea of limitations brings to mind "The Tragedy of the Commons." In this case the "commons" involves air, water and climate. The commons are, by definition not part of the market and their use/abuse carries no economic cost to the user. An example of one success story in regard to air pollution is the effort of California's legislation to clean up auto emissions. It illustrates that regulation succeded where the market failed to do anything but aggravate the problem. California's legislation regarding auto emissions standards has served as a model for other areas in the U.S. (The Northeast states adopted similar rules) and outside the country (Catalytic converters and many of California's regulations were finally adopted in Mexico City). The market, especially the Japanese, responded, but it would not have occurred without regulation. The California state government couldn't provide a price signal. The air (the "commons") was not included in the market, not given a price. However, the cost of the air pollution was born by people's lungs and eyes. It was a non-economic cost, though a very high and physically painful one. We have to intervene collectively to stem those externalities which we find repugnant or unhealthy. Regulation should not be viewed as interfering with the market. In this case the market was both failing us and interfering with our collective health and welfare. It is appropriate in a democracy that such externalities be addressed. If possible, the regulation should be designed not only to eliminate negative externalities, but, in addition,to create positive ones. Clean running cars provide clean air, less asthma and fewer heart and lung problems. The auto industry didn't collapse and our air improved.

We Californians wanted breathable air, but, individually, could not force the market to respond. How would it be possible to buy a less polluting car if there are none to buy?? Regulations gave us that option forcing the market to create something we needed in order to breathe. This is another flaw in the concept of the market. It may need regulation because it does not necessarily produce what people want to buy.

There is another area where the market is deficient. Large-scale endeavors and those with communitarian goals need a large entity to bring them about. For instance, we want to have an educated citizenry so we provide free (or more affordable) public education at all levels. (Granted, achieving this goal has become increasingly problematic in recent times, but, so far, we haven't shut down the public schools and thrown everyone into the private education system!) Often these community-wide goals need to be fostered by the government either directly or indirectly. Several more examples:

--The evolution of the internet, which has given a whole new meaning to the concept of "infrastructure" was done through the work of universities, the military and others. It was too big and wide-ranging to be generated in someone's garage.

--National Institutes of Health which not only develops the flu vaccines we use each year, but most of the breakthrough drugs which are later produced by companies. Much as Big Pharma claims that they need to charge high prices to fund their research, they mostly come up with "me too" drugs, not the big breakthroughs. Those take place largely in universities under the aegis of the NIH.

--Regulation creating smoke-free areas--in California, making it a virtually smoke-free state. Trying to get rid of cigarettes through the market just seemed to enrich the tobacco companies. Public health in this regard has improved. Cancer rates, partly for this reason, have started to actually go down. Making cigarettes extremely expensive didn't work. Making it, through regulation, extremely difficult to find a place to legally smoke did.

I'm sure you can think of many others.

Further addressing the concept of the FREE Market which those on the Right subscribe to in such a slavish and blinkered fashion, there are several reasons why the FREE (i.e. largely unregulated) Market is a MYTH:

--For one thing, the FREE Market assumes several conditions. One of these is perfect knowledge. Something we don't have. When you buy a can of meat, how do you know it's not contaminated? The answer is that you don't. In this country you are counting on goverment regulation and the ethical conduct of the producers to provide a safe product. Perfect knowledge might have prevented the Mortgage crisis and the derivatives mess, but it doesn't exist, so the mess happened. Absent perfect knowledge, we need regulation, so that our assumptions of safety are supported and in order to provide stability to the markets. Conservatives carp that industry needs less regulation. It may be possible to have too much regulation. However, after the spinach crisis in California which kept all spinach from all spinach growers in the state from reaching the market for an extended period of time, guess who requested better regulation and inspection? The Spinach growers. Those many who were not at fault wanted to have the assurance that the few where there might be a problem were stopped or located quickly. Regulation can contribute to stability for the producer as well as the consumer. Stability does not have a market price, but the cost of paying for the regulators does. Therefore, just looking at the market reaction to regulation does not provide an accurate picture of the value of regulation. The market only register the cost, not the benefit.

-- For another thing, a FREE market also assumes the free flow of labor, including across borders. Just as we do not have perfect knowledge, we do not have a free international flow of labor. Also, there are workers in declining industries in this country that can't move because they can't sell their houses there being no market for them when their whole community is suffering. The idea that workers can just pickup and go to where there is work is not always true. Hence, the need for retraining and for some kind of plan by the community or local government to help develop new sources of jobs. This can take a long time, and may never happen adequately. Flint Michigan is an example.

--Additionally, in a totally unregulated market, anything for which a market price could be determined could be freely bought and sold. That could include things such as the following: 1) Prostitution;
2) Slavery; 3) Addictive drugs. These things have a market price and ARE bought and sold, but, at least in our economy, are illegal. As a society we have decided that these are not in the ethical sense "goods", but rather "bads" and therefore should not be included in the market. Well, if we can legislate against these things, then why would we not legislate against air polluters, water polluters and CO2 producers as endangering our health and welfare and indeed risking the health of the entire planet?? Those aren't "bads"? It is NOT a question of whether to regulate in a market economy, it is a question of WHAT TO REGULATE and TO WHAT DEGREE. The market is a human construct, and we are entitled to modify the rules under which it works.

It can be argued also that the market doesn't do a very good job of distinguishing between the LONG RUN and the SHORT RUN. If you are a Senior in high school and want to earn as much money as possible the year after you graduate, would you go to college or get a job? Obviously, you would get a job since going to college is only going to cost you money. If, instead, this Senior wanted to earn as much as possible during her lifetime, her decision would be different. In that case, she would probably opt to go to college. As demonstrated by this example, the difference between thinking in terms of the long run as opposed to the short run can lead to dramatically different decisions. In your description of what has happened to the solar industry and the wind turbine industry which were not nurtured during a prolonged period of ups and--mostly--downs in energy prices, the short run was really all the market cared about and our government policies did little to counteract that. When there is something we regard as vital to our welfare, like milk, we do support it (with price supports) to ensure that is will be available regardless of the vagaries of the market. Who would be opposed to supporting milk?? Well, the mother's milk of our energy future needs support just as surely. It's really no different.

Frankly, now that your ideas for energy development seem to be gaining so much traction, I think the only way you can inveigh against those who cannot recognize the need for government action is to destroy their arguments in support of an unfettered market just as you so convincingly demonstrated the urgent need to develop a sustainable energy economy. I'm not sure this is possible in a single chapter or even two of them. IT MAY TAKE NOTHING SHORT OF ANOTHER BOOK! There are many things the market is incapable of doing. The whole concept of a Free (unregulated) Market is so erroneous and so obscures clear thinking that it needs to be exposed as untenable. It is merely an excuse to do nothing, which, as you so ably demonstrated in your recent book is really not an option. You can't ask for a price signal where there isn't going to be one. You can, however, make a convincing case for why The Market should be strategically designed to serve the planet. It is not the sacred and untouchable cow so many have tried to make us believe. You introduced the idea of the "energy economy". Now is the time to introduce a new way of viewing The Market itself.

I applaud you for writing this book. I hope it will be read by enough people, as well as understood, to ignite a "Revolution". That's truly what needs to happen...and soon. I believe in keeping it simple so implementing a permanent federal gasoline tax of $1.00 per gallon would let the “market” take care of the rest. Hoping Obama has the balls to push it through!

I just read your article, "Win, Win, Win, Win, Win..." and completely agree with you. Generally, I agree with Obama's stimulus plans, but he's running the risk of having a "train wreck" on his green plans. You can't allow gasoline prices to fall to $1.50 or $2 a gallon while pouring govt. sponsored capital into technologies designed to move us away from gasoline. He runs the risk of spending billions "to create millions of green jobs" and winding up with little to show for it. Try getting re elected on that track record. You clearly understand this. You're highly regarded by much of the country. You've got to move the dialogue towards your views. A gas tax should be used to PAY for the investment in green tech. Not only will it make the green tech effort more successful, but it will also help reduce the size of the gargantuan deficit. You could almost force the effort to be successful if you set the tax high enough, though that could be bad for the economy. I'm only suggesting imposing a tax that would keep gas prices at $2.50-$2.75 a gallon. Those prices until very recently were viewed as a bargain by the general public. The government seems to have blown it, and now OPEC will capture the gradual rise in oil prices that OPEC has been recently enacting, if you hadn't noticed.

Hello Tom:
I just finished reading Hot, Flat, and Crowded. The part that really brought tears to my eyes was about the U.S. solar tech company that became a German success story.
This drives home the point that the U.s. market, as currently constructed, with the "all-you-can-eat" buffet of cheap (cheap because pollution, and carbon emissions, our being held hostage to foreigner influences are not factored into the cost) fossil fuels will not reform itself without a change of incentives. Leadership has to provide these incentives by taxing carbon. I agree that incentives need to be he form of 1) substantial gas-at-the-pump taxes (i.e., a fluctuating tax that keeps gas at, say, $4.00+ per gallon or whatever the economists agree is the change incentive) and 2) a carbon tax in the utility bill (talk of “clean coal”,an oxymoron, is just a delay tactic).
We should be looking at what has been accomplished in Sweden (see letter, above), Denmark, Germany, as well as policies taking shape China, as you noted in your book.
I agree with other writers that once the long-term market incentives are put in place, the technology will take care of itself.
My biggest fear is that complacency, due to ignorance, as well as resistance to change, due to entrenched interests, will perpetuate business as usual. Let's find out where each and every one of our elected officials stand on these issues, and work to dispel the political obstacles to change. Your analogy is astute, when you say that with the fluctuating price of gas, every time the price goes up, we are paying "taxes" to the Saudis and terrorists – taxes that could have been used right here in the U.S. to promote energy efficiency, energy independence, conservation, and noncarbon fuel and power sources. We need to get this point across to our elected officials.
You are also right that a grass-roots movement can be instrumental. I’m beginning my letter-writing today.

The politics of a carbon tax are obviously problematic, but if there ever is a chance to squeeze something in, it would be as part of the stimulus package. With tax cuts already on the table and no immediate need to balance the budget, lets try adding a carbon tax with a 100% offsetting cash rebate to all taxpayers, weighted toward the lower & middle class. This would put cash in peoples hands to offset increased gas prices. Those that conserve get an extra bonus.

As someone who has just returned to the US from Europe (where up to 80% of the cost of gasoline is tax), I agree - broadly - with your 12 / 29 / 08 "Win, Win, Win, Win, Win" article proposing a gas tax increase of $0.10 per gallon per month over the next two years........ but there are two big problems:

FIRST, this level is probably too high to be politically acceptable. In two years time, oil prices are likely to be back over $100 per barrel (which will equate to a gas price of over $3.00 per gallon at the pump), and will mean over $5.40 per gallon to the consumer under your system. Not nice.

Also, as we've seen, oil prices can go up and down dramatically. How about modifying your proposal to a tax increase of $0.05 per gallon per month so long as average prices at the pump (including the tax) stay below - say - $4.00 per gallon. Once average prices hit $4.00, the monthly tax increase stops; Once average prices at the pump increase to $5.00 per gallon, the tax drops by $0.05 per gallon. This could be a nice way to help even things out, and add some stability to an uncertain world.

SECOND (and this remains a problem in Europe), this tax will generate a lot of revenue. The temptation will be for the Government to put this into the general coffers (as it does in most European countries).

If this tax is to be broadly acceptable to Americans, the revenues should be used only for specific, pre-agreed items such as improved transport infrastructure or development of green technology. NB, both of these items are in the new administration's spending proposals, so this would help balance the budget.

To MW and others who want to tax and/or subsidize certain types of vehicles, for example tax trucks and subsidize hybrid vehicles:

This is bunk. If you want to reduce usage of certain fuels, then tax these fuels. Encouraging people to buy more fuel efficient vehicles with a subsidy does nothing if fuel is cheap, because they simply tend to drive farther. Subsidies and indirect taxes just end up confusing the markets so that our taxes are spent in very unfair and inefficient ways with questionable net benefits, Whether or not we should levy more taxes on fossil fuels should also be debated and tested very carefully before wide scale implementation, so that we don't mess up the economy unduly. If oil becomes more scarce the price will go up and alternatives will be developed and/or usage will decrease through more conservation..it's not clear that we need more price signals.

We must set a price signal high enough to push ourselves away from foreign oil dependency and toward sustainable energy sources, but it simply won't be done during this economic crisis. What if the Obama administration attached green strings to stimulus packages for both businesses and citizens in the immediate future, funding strategies that move us toward energy independence and greater global competitiveness? During the stimulus period, they also should announce a large fuel tax to take effect in 18 - 24 months. By then, the pendulum likely will be swinging back toward a strengthened economy and, even if is not, that would give each of us time to prepare. Announcing the tax now would keep us focused on what must be done to get off our self-destructive path. The proceeds from the taxes could fund expanded jobs in the energy and infrastructure sectors as well as be rebated to those who give back to our society by making their homes or businesses greener and themselves better ready to compete in the global market through education and training. For the smart citizen, such a tax could be a wash.

Eliminate the Personal and Corporate "Business" tax write off for car's ( mostly subject to fraud and abuse) and LOWER the corporate and personal income tax.Implement the FAIR TAX by ELIMINATING all other Travel,,Meals,Hotels Conventions" Business Deductions"(another tax payer subsidy which we all pay for) which the tax payer should NOT UNDERWRITE with a lower corporate tax.Its the subject which NO Political Party will touch.Why hasn't the IRS ROLLED BACK MILEAGE ALLOWANCE to reflect $1.50 gas.
Joel steinfeld ,Annandale NJ